House hunting in a hot market requires cool calculation

By Tony Poland, LegalMatters Staff • It can be easy to get burned in a hot housing market, especially for those who fail to do their homework, says Toronto real estate lawyer Mariya Berenbaum.

Berenbaum, founder of MB Law, says those taking the plunge during the current home-buying frenzy should ensure they are not getting in too deep.

“I certainly do not have a crystal ball and it’s difficult to predict where the market is headed,” she tells LegalMattersCanada.ca. “But we are going through unprecedented times with COVID and economic instability. Unemployment, layoffs and income reductions are happening all over the country and yet the real estate market remains strong.

“I sympathize with first-time homebuyers who are rushing to get into the market before they get pushed out completely. As prices rise, many are not able to afford housing,” Berenbaum adds. “Some people are jumping on the wagon just to be able to get into the market and it’s no longer the dream home they wanted and expected. It’s merely a home.”

Average selling price exceeds $1-million

The Toronto Regional Real Estate Board (TRREB) reported record home sales in the Greater Toronto Area in February. Fuelled by low borrowing costs, GTA realtors reported a 52.5 per cent increase in sales for the month compared to February 2020, with the average selling price climbing over the $1-million mark.

“The pandemic has not stunted GTA residents’ appetite for owning a home. Once the economy opens further and immigration into the GTA resumes, there will be an even greater need for housing supply,” says TRREB CEO John DiMichele. 

Berenbaum points to one news report that saw a seller receive 20 offers for a semi-detached home that sold for $575,000 above asking as an example of the pressure buyers are facing.

“There’s no doubt it’s a sellers’ market,” she says. “Buyers can get frustrated. They put in an offer and they get outbid. And not by $10,000 or $20,000 but by $100,000 or $200,000. It can be very discouraging. As a buyer, you might feel you almost want to be done with it.”

That’s when buyers are more prone to making a costly mistake, Berenbaum says.

“The attitude becomes ‘Let’s put all the chips on the table. We don’t want to play this game anymore. Let’s just go all in,’” she says. “You do get defeated because this process of looking for your dream home, which is supposed to be exciting and rewarding, becomes very demoralizing. 

“It gets to the point where people say ‘Let’s just get anything because if we don’t get something now, we won’t be able to afford anything in a month.’”

Buyers tempted to take risks

Buyers are often tempted the take risks to come out on top, such as waiving the home inspection, Berenbaum says.

“The problem is there’s pressure out there to remove conditions because the market is so hot,” she says. “You can go in with a firm offer with no conditions, but then at the end, you could be stuck with a house with a huge issue, such as termites or mould. Will you be able to pay for a big repair?”  

Some sellers are allowing buyers to conduct an inspection before the offer date to ensure that the buyers know what they are getting, says Berenbaum. 

“If you cannot put an inspection condition in the offer then conduct an inspection before the offer date if allowed,” she advices.

Berenbaum says buyers should also assess the risk when attempting to come out on top in a bidding war.

“It’s possible in these situations that you are bidding with your heart rather than your brain,” she says. “You may win the house but if your bank comes in and does not appraise it at the price that you paid, you’re left with the gap of what the property is worth and what you’ve paid for it. That difference comes out of your pocket.

“In the best-case scenario, you have savings to cover the shortfall,” Berenbaum adds. “Worst-case scenario is you can’t find the money to close the gap, be it with a second mortgage or relatives or friends. Then you default on the agreement of purchase of sale and you are unable to close.”

That’s when it can become a legal problem, she says. One remedy is for the seller to put the house back on the market.

‘On the hook for seller’s loss’

“If the seller is lucky, we’re still in an extremely hot market and they get the same price or better,” says Berenbaum. “But if the market has cooled substantially and the property goes for hundreds of thousands less than what you had agreed to pay, then you are on the hook for the seller’s loss.”

Many buyers will offer a large deposit to sweeten the deal and win the bid. If they fail to close on the home, they may have to forfeit that money, she adds.

“You may be able to negotiate a mutual release but each case is unique,” Berenbaum says. “If you can’t close, the deposit is forfeited. And not only do you lose your deposit, you open up yourself to damages.”

She says the hot Toronto market is reminiscent to the 2017 boom that saw prices climb 34 per cent in March over the same time in 2016. But by May the market fell by 20 per cent.

Berenbaum says some new home buyers found that the property they bought was worth much less by the time it was appraised by the bank and asked builders for the price to be abated.

“But contract law is quite clear. The buyer signed a contract,” she says. “It’s binding and therefore there’s not much they could do.”

Need for intervention downplayed

While the government stepped in to slow the market in 2017, it appears, for now, policymakers are standing pat as the economy recovers from the impact of the pandemic. According to CP24, Bank of Canada Governor Tiff Macklem said in February that even though the housing market showed “some signs of excess exuberance” he downplayed the need for intervention.

“Right now the economy is weak, we’re just coming out of the second wave. I think we need the support, we need the growth we can get,” Macklem said.

Berenbaum says because buyers are faced with a challenging situation, they should ensure that they are prepared, financially and emotionally, when house hunting.

“You have to buckle down and do what has been working successfully for years. Get those savings, get that mortgage, eliminate unknowns with inspection/condo certificate reviews,” she says. “Obviously, you have to get your financing straight. Get pre-approved for whatever the amount you are comfortable with and stick to it.”

Be honest about your needs and expectations, Berenbaum says.

“The bank may tell you that you can afford to carry a mortgage of $1 million but you may have your own risk tolerance of $600,000. The bank will say what you can afford but you have to consider what is reasonable for you,” she says. “You may have to cut down on certain expenses so figure out what you want more – a mortgage or a lifestyle. You need to service your debt. Have a plan when the interest rates go up or when property values diminished.”

Buyers need to “do as much homework as they can ahead of time” to limit the gamble when purchasing a home,” Berenbaum says.

“To paraphrase the OLG line, ‘Know your limit, stay within it,’” she says, “That’s sound advice.”